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Which of the following can the government use to address an externality?
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7. Externalities
Public Solutions to Externalities
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Which of the following is a feature that quotas and embargoes have in common as public solutions to externalities?
A
Both set a minimum price for a good.
B
Both encourage unlimited trade of the good.
C
Both provide subsidies to producers.
D
Both restrict the quantity of a good that can be traded.
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Understand the context: Quotas and embargoes are government-imposed restrictions used to address externalities or regulate trade.
Recall the definition of a quota: It is a limit on the quantity of a good that can be imported or produced.
Recall the definition of an embargo: It is a complete ban or restriction on trade of a particular good or with a particular country.
Compare the effects of quotas and embargoes: Both limit the quantity of the good that can be traded, either partially (quota) or completely (embargo).
Conclude that the common feature is that both restrict the quantity of a good that can be traded, unlike price controls or subsidies.
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